Moat Investor

I Love Sirius (SIRI), But I Don’t Understand It

I love Sirius radio. In fact, I have two receivers and would have a third installed if it were a little easier on my new cars dashboard. I also am not a big fan of XM. I think the programming at Sirius is by far superior to the programming at XM and at the end of the day, the programming is the secret sauce by which any radio station lives or dies, satellite or terrestrial.

So you can imagine my elation when I heard that, not only are Sirius and XM planning to merge, but that Sirius CEO Mel Karmazin will lead the new combined company, should the merger pass regulatory approval. Imagine combining Sirius programming genius and talent base with XMs marketing muscle and technology. If only I had bought 10 days ago before the plans were announced and the stock jumped almost eight points in a single day.

I have little doubt that the combined company, should the deal proceed, will average well beyond the minimum 10% rate of equity return I look for in an investment. The problem with Sirius is that I cannot evaluate it as a Moat Investor.

There is simply not enough data to make me comfortable with the investment. This is fine for what Phil Town would call a high-risk portfolio, but not a value investment. Not unless you can answer the following questions well enough to risk your retirement.

• Will the merger pass the scrutiny of Federal regulators? Federal law prohibits two licenses from being owned by the same company.
• Will the combined company be able to finally generate some profit? Remember that investors are really looking at the net present value of future free cash flow. Both XM and Sirius have amassed large financial losses in their effort to gain new subscribers and commitments to high-priced personalities and programming.
• What do you do with the competing receivers that cannot share signals. That is, currently XM and Sirius radios and receivers use different chips that are incompatible with each others satellite feeds.
• The combined company looks like it would have a monopoly-like moat – but it depends how you define the market. Sirius and XM will have to make the case that they actually face more competition from Apple, Microsoft and Motorola than they do from each other in order to pass through the anti-trust vetting. Yet, if that argument is true, then the moat doesn’t really exist.

I’m sure that a lot of people are going to make a lot of money from investing in Sirius. I’m a loyal subscriber who believes in what Karmazin is doing. But I can’t figure out the moat story or the growth story like I can with companies like Panera (PNRA) and Guitar Center (GTRC), which I think deserve a second look before you pass them by for Sirius.